The American Interest
Analysis by Walter Russell Mead & Staff
Peak Oil? How about Peak China?

It may be hard to believe, but it’s been a full four years since China hosted the Olympics. At the time, Beijing 2008 appeared to herald China’s return, after a 500 year hiatus, to great power status. Commentators were falling over themselves to pronounce the inevitability of China’s rise and its implications for American influence in Asia.

But is it possible we will look back on those Olympic Games as the peak of Chinese power, rather than the beginning of its rise? That’s the provocative argument espoused by The Diplomat:

Everything began to go downhill afterwards.  Caught up in the global economic crisis, the Chinese economy has never fully recovered its momentum.  To be sure, Beijing’s stimulus package of 2008-2009, fueled by deficit spending and a proliferation of credit, managed to avoid a recession and produce one more year of double-digit growth in 2010.  For awhile, Beijing’s ability to keep its economic growth high was lauded around the world as a sign of its strong leadership and resilience.  Little did we know that China paid a huge price for a misguided and wasteful stimulus program.

The bill for that massive spending is now coming due:

Today, Chinese economic policy-makers are hamstrung in trying to revive economic growth.  The combination of local government indebtedness, massive bad loans hidden in the banking system, anemic external demand, and diminishing returns from investments has made it all but impossible for Beijing to use the same old economic playbook to fire up the economy.

According to The Diplomat, the long term outlook is even more depressing. China will have to confront a series of structural challenges if it is to continue to achieve the kind of dynamic growth that lifted the country from economic backwater to emerging great power in just three decades.

The most obvious challenge is demographics. A RAND study observed that the proportion of the Chinese population of working age peaked in 2011 and began slowing this year. The share of the elderly population is rising. Healthcare and pension costs will soar as a result. So will labor costs. Investment and savings will diminish. In short, China may face the prospect, unknown in human history, of growing old before it gets rich.

The environment presents another dilemma. Like many rapidly industrializing economies, China sacrificed environmental protection at the altar of economic growth. But the effects of this approach have taken a toll: already, argues The Diplomat, ”Water and air pollution today cause 750,000 premature deaths and around 8 percent of GDP.” And as Via Meadia recently pointed out, the political costs of this approach are starting to mount as well. An outbreak of NIMBYism has forced many local officials to cancel major industrial projects as ordinary Chinese citizens demand an end to environmentally unsound development.

Of greater concern is that China has backed away from market reforms in the last decade and embraced a version of “state capitalism” that emphasizes the state far more than it does capitalism. But as state-run entities have become more powerful, their political backers—and financial beneficiaries—have an even greater stake in blocking attempts at reform.

And despite its best efforts at censorship, Chinese officials now concede that the internet has become too hard to regulate completely. For the first time, government policies “are being challenged for their reasonableness and legitimacy”, while at the elite level the Bo Xilai affair lifted the facade of unity to reveal a deeply fractured leadership.

Externally, too, China faces a more complex strategic environment than it has for decades. The U.S., which had been distracted and bogged down in the Middle East and West Asia since 2001, has begun to refocus on Asia, much to the delight of most of China’s neighbors. At the same time, as Beijing tries to assert itself, particularly in regards to the South China Sea, smaller powers such as Vietnam and the Philippines are pushing back, emboldened by Washington’s renewed commitment to the region.

It’s a grim analysis, not just for China but for the rest of the world as well. It is not in anyone’s interests to see China flounder. A rich China, secure in its legitimacy at home and abroad, is also a stable China, capable of powering the growth of her neighbors as well as offering a huge market for U.S. products.

The upcoming leadership transition, to be held later in the fall, offers a chance of renewal.  Whether Beijing can rise to meet the challenges of the first decades of the 21st century as it did the last decades of the 20th remains to be seen. The challenges are not insurmountable, but they will require enormous political courage in the face of powerful vested interests.

Published on August 11, 2012 12:00 pm
  • Luke Lea

    “It is not in anyone’s interests to see China flounder. A rich China, secure in its legitimacy at home and abroad, is also a stable China, capable of powering the growth of her neighbors as well as offering a huge market for U.S. products.”

    Silly half-truth. Sounds good though.

    A democratic China that is prospering would be a good thing for the Chinese people most probably, and we should work for that change by placing conditionality on all our economic relationships with that society.

    Even so, the consequences for us, the effect on the distribution of income between labor and capital, remains a major challenge to US democracy and the ideal of government for the people.

  • Ed

    This could be another chapter in Paul Kennedy’s “The Rise and Fall of the Great Powers”.

    While his history was sound (and most likely carefully crafted to fit his thesis)his predictions of the decline of the US and Europe and the rise of Japan only one-third correct. Now it seems China never really made it as so many predicted.

    The US won’t last forever, but it is based on such a uniquely different viewpoint of the relationship between the ruled and the rulers that it won’t fit easily into the models used to describe the rest of the world. The redefinition of America that will keep it floating on top is underway as I write just as it was in the 80′s when Mr. Kennedy was writing.

    A billion Chinese having their economic decisions made for them by a committee of aging plutocrats will never, over the long-term, outperform 307 million Americans making their own economic choices. That’s not jingoism, that’s reality.

  • Jacksonian Libertarian

    “It’s a grim analysis, not just for China but for the rest of the world as well. It is not in anyone’s interests to see China flounder.”

    But it is in America’s interest to see the Communist Party fall, and if it takes China’s floundering to do it then so be it.

  • Hubbub

    “… a stable China, capable of powering the growth of her neighbors as well as offering a huge market for U.S. products.”

    And here I was thinking just the opposite – that the U.S. provided a huge market for Chinese products.

    D’oh!

  • Luke Lea

    Here is a greate new China site (new to me that is); follow the links:

    http://uselesstree.typepad.com/useless_tree/

    Here’s a link for example:

    http://tinyurl.com/c8tug3v

  • Luke Lea

    Another nice piece on China:

    http://tinyurl.com/cwq33m7

    It gives me that which side are you on feeling. ViaMeadia needs to make a decision for Christ (in a manner of speaking).

  • Luke Lea

    China quote:

    ”Since the 1970s my mother resolutely opposed and resisted using performance drugs and so she has been persecuted by the training bureau of the Sports Commission,” he writes in his book’s preface. ”In 2007, my father passed away during a vicious attack by relevant people from the General Administration of Sport.”

    In 2007? That’s like now.

    http://tinyurl.com/clcyelo

  • Denver

    “. . . is it possible we will look back on those Olympic Games as the peak of Chinese power . . .”

    A nation that survived Mao? Hardly. The question is will China become expansionist/neo-colonialist, or maintain their historical inward looking perspective.

  • vb

    China is an empire. In the age of instant communication, empires don’t last. For an example of why this is so, look to Taiwan. The Chinese leaders are scared to death of Taiwan because of the real world example it sets for all of the would-be nations which make up the Chinese empire.

    The Soviet empire lasted 3 generations. Look for the Chinese empire to last about the same length of time.

  • gringojay

    War has historically been shown to cull population & redirect people’s attention.
    China’s leaders may find that regionally
    expedient.

  • http://opines.mythusmage.org Alan Kellogg

    What China is doing is demonstrating that top-down control doesn’t work. It didn’t work for Moscow, it hasn’t worked for Beijing, and it won’t work for Washington.

  • Abelard Lindsey

    Both the bulls and bears are wrong about China. I think China still has a good 20 years of growth left in it before it does the Japan-like stagnation. Granted, this growth will be in the 6% range rather than the 10% they had during the last decade.

    China will likely grow an average of 6% over the next 10-15 years, followed by 4% over the following 10-15 years. This will make their economy about twice the size of ours, with a per capita income about half to 2/3′s ours.

  • TTT

    Try again, Walter.

    China’s GDP, as measured in US$, has grown over 100% since 2008.

    America’s has grown about 8%.

    All figures are for nominal US$ GDP.

    China could slow down in the future, but to claim it has already happened, is totally wrong.

  • Doug

    Let’s keep in mind China’s famously looooong term outlook. 4 years is an eyeblink to that country.

  • Dick Eagleson

    I have previously enunciated elsewhere, and now here, what I modestly call Eagleson’s Summer Olympics + 9 Law of Totalitarian Eclipse. Nazi Germany: Summer Olympics in national capital – 1936; Fall of Regime – 1945. Soviet Union: Summer Olympics in national capital – 1980; Fall of Berlin Wall – 1989. Chinese People’s Republic: Summer Olympics in national capital – 2008. We may expect the current Chinese regime to suffer an existential blow of some kind in 2017. I do not rule out the possibility that the regime may struggle against its certain doom for a year or two as did the last masters of the late USSR before formal interment takes place, but be alert as 2017 approaches. Big doings in store away East.

  • http://atlantarofters.blogspot.com The Sanity Inspector

    I liked what someone said several years ago: China is a civilization masquerading as a nation-state.

  • ThomasD

    “China may face the prospect, unknown in human history, of growing old before it gets rich.”

    Even worse China faces the prospect of getting old before it gets fed.

    China was depending on it’s export market financing it’s transition to first world agricultural production.

    They are not there yet, if they do not reach such a state soon they will never be able to feed the bulk of their populace.

    That would be catastrophic.

  • TBlakely

    Well the big danger with China is that they have a huge chip on their shoulder. They consider themselves the premier culture in the world for millennia but have been getting their asses handed to them for centuries. It’s not going to end pretty if they do have a big collapse since they finally thought they were assuming their rightful place as the center of the world. Unlike the Soviets I doubt the Chicoms will slink off meekly into history.

  • Richard Aubrey

    WRT war: China may find war distracts the population. Nothing concentrates a parent’s mind like the prospect of their only child dying in combat.
    It was said that UN commanders in Korea didn’t know what China’s goal was. Some speculated it was population control. Later, some commenters remarked that the government sacrificed a million of “southern” (?) Chinese to get rid of them for some internal reason. Hard to know.
    But, given the demographics, China can hardly afford to lose a million dead and some substantial fraction crippled and economically useless.

  • Sisyphus

    TTT, do you have a citation? Because 100% nominal growth since 2008 requires 18% annual growth in nominal GDP. And as fast as China has grown, they don’t have 18% nominal GDP growth. According to the chart and associated data from this page, they have not had a single quarter with greater than 12% growth (which is itself exceptional): http://www.tradingeconomics.com/china/gdp-growth-annual.

  • TTT

    Sisyphus,

    Check out Wikipedia and search for ‘past and future nominal GDP’.

    The Yuan rose by about 30% against the dollar. So if China’s Yuan nominal GDP rose 70% over the period, the US$ GDP rose 100%.

    In 2008, China’s US$ GDP was $3.5T

    In 2012, China’s US$ GDP is $7T.

    100% gain.

  • TTT

    Sisyphus,

    Your comment indicates you don’t know the difference between nominal and ‘real’ growth.

    The discussion is of China’s US$ GDP in nominal dollars. That grew 100% from 2008-2012.

    India grew about 60% over that period. The US grew 7%, and Europe about 0%…

  • Nick

    TTT is blathering like a dimwit. That growth happened during the stimulus, so it’s largely just another meaningless bubble, and compromises such brilliant ideas as “The Great Wall of Solar Panels”

  • Eurydice

    It seems to me that China is more in the position of the python that’s swallowed a cow. It looks pretty uncomfortable, but digestion can’t be hurried.

  • TTT

    Nick,

    TTT is blathering like a dimwit.

    Pure projection.

    Here are the tables of nominal GDP by year that record that China grew 128% from 2007-12 :

    http://en.wikipedia.org/wiki/List_of_countries_by_past_and_future_GDP_(nominal)#IMF_estimates_between_2000_and_2009

  • Akatsukami

    At the time, Beijing 2008 appeared to herald China’s return, after a 500 year hiatus, to great power status.

    Five hundred years would put China’s peak during the Ming. Unless we spin that Da Qing strength was purely Manchu, and none of Han, I think that we should put China’s last peak during the reign of the Qianlong emperor.

  • http://radio4scienceboards.proboards.com/index.cgi?board=witter&action=display&thread=599 marchesarosa

    Regarding the Chinese population and war.

    A nice little regional and looong conventional war between China and India could ease the demographic imbalance both countries, but particularly China, are experiencing because of culturally sanctioned selective infanticide and abortion of girl children.

    A war could nicely decimate the male population who are currently experiencing fierce competition to get a wife and bring the sex ratio back into balance.

    It could be that Mao was so damned clever that he KNEW the Chinese cultural preference for boys would exaggerate the effect of the One Child Policy even more by falling disproportionately on the child bearing half of the population. Well spotted, that man!

    But, as has been noted, the consequent ageing of the population is therefore coming much earlier in the cycle of economic development than would otherwise be the case.

    Unintended consequences and problems ahead, perhaps! We’ll see.